In a recent case the court found that a limitation of liability in a contract between a Project Manager and an Employer was unenforceable.
This case concerned a dispute between the Project Manager and the Employer in respect of the construction of new boarding accommodation at Ampleforth College. The works were one of three projects in relation to the college in which both parties were involved. There was no dispute as to the quality of the works but there were significant delays to completion.
The Employer brought proceedings against the Contractor which settled at mediation for substantially less than the Employer expected due to the reliance on letters of intent rather than a formal contract. The Employer then brought proceedings against the Project Manager claiming damages for professional negligence. The Employer claimed that if the Project Manager had acted with care and skill, it would have ensured the Contractor execute the building contract (rather than letters of intent) and that would have produced a more advantageous outcome in the dispute with the Contractor for delay, as the Contractor would have been liable for liquidated damages.
Breach of duty of care by the Project Manager
The judge described the Project Manager’s role as being a “co-ordinator and guardian of the client’s interests” and stated that efforts to finalise the contractual arrangements were “fundamental” rather than “a mere aspiration”. Although there was no absolute duty on the Project Manager to procure the execution of the building contract, the court held that by issuing repeated letters of intent and failing to advise the client of the risks in doing so, it was in breach of its obligations under its appointment and at common law, by treating the contract as a “dispensable luxury”.
Had the contract been executed, the Employer would have recovered an additional £340,000 by way of a reasonable settlement, of which two thirds was payable to reflect the size of the chance that the Contractor would have signed the contract. The Employer was therefore awarded damages of £226,667.
Limitation of liability found to be unenforceable
When submitting its fee proposal for this project, the Project Manager attached its standard terms and conditions, including a limitation of liability which had not formed part of the Project Manager’s appointment on two earlier projects at the college. A limitation on liability incorporated into the Project Manager’s retainer, on this third project was found to be unenforceable as it did not meet the requirement of “reasonableness” as set out in the Unfair Contract Terms Act (UCTA) 1977.
Had the limitation been enforceable, the Project Manager’s liability would have been limited to the amount of its fee, which totalled £111,321.
Judge Keyser QC found this limitation to be unreasonable, emphasising the disparity between the £10m professional indemnity insurance required under the retainer as against the liability cap of less than £200,000. He found that the parties had implicitly contracted that the cost of the £10m insurance would, as a matter of commercial reality, be passed on to the Employer within the fees payable. Consequently, upholding the limitation of liability would render that cover illusory. In fact, it might be debated whether it was implicit in the contract for the Employer to pay for the PI cover, as consultants generally take out PI insurance to cover all their activities for the period in question, not just for a particular project.
The Judge also found force in the Employer’s submission that it was wrong, after building up a relationship of trust over two previous projects, for the Project Manager to seek to introduce such a limitation which was inconsistent with the contractual requirement for substantial PI insurance, without any specific notice and discussion.
Implications for limitation clauses in appointment contracts
The decision in this case has raised concerns in some quarters that it may be more difficult to enforce a limit of liability in a consultant’s appointment. We do not think so, providing the factors below are considered in advance of contracting.
It is important that the limit of liability is brought to the attention of the client, discussed and specifically agreed. This is particularly so where a consultant is contracting on his own terms.
Although the starting point for fixing the limit might be, say, ten times the fee, this will not always be the appropriate limit – other factors could dictate a greater or lesser amount, for example, the risks of the project and the damages that could be payable if the consultant were negligent.
The current case should not be taken to indicate that a limit is only going to be reasonable if it is for the amount of the consultant’s current professional indemnity insurance. The amount has to be fair and reasonable having regard to all the circumstances; the limit is more likely to be considered ‘reasonable’ when based on an assessment of the likely cost of the work rather than an arbitrary (and perhaps unrealistically low) figure.